Investment and
development
A discussion paper on investment,
development and the poor
Bryan R Evans
Tearfund, 100 Church Road, Teddington, Middlesex TW11 8QE, UK
Tel. 020 8977 9144
Fax 020 8943 3594
Tearfund discussion papers are short exploratory research papers aimed at provoking wider
discussion of development-related issues among Tearfund staff and the organisations and
individuals with which Tearfund works. They do not necessarily constitute Tearfund policy.
Comments from readers are welcomed.
Bryan Evans is a researcher in Tearfund’s Public Policy Team and may be contacted by email at: Bryan.Evans@tearfund.org
Contents
Executive summary
Page
1
Introduction
2
Investing in the developing world
3
Definitions
Current trends
For better or worse?
5
Advantages of FDI
Disadvantages of FDI
Short-term (speculative) flows
10
The problem
Currency speculation
Regulating international capital flows
The Multilateral Agreement on Investment (MAI)
13
What is MAI?
Criticisms
UK policy
The OECD Guidelines for Multinational Enterprises
The Third WTO Ministerial Meeting in Seattle
16
Biblical teaching on investment
16
Wealth creation or wealth denial?
What kind of investment?
The question of interest
Principles
20
Conclusions and recommendations
21
Investment by individuals
Investment by corporations
APPENDICES
25
Glossary
The UK’s top transnational corporations
ABBREVIATIONS
28
SOURCES
28
Executive summary
Foreign direct investment (FDI) is now a major, emerging development issue. The current
orthodoxy sees FDI as more beneficial for development than debt finance, bringing access
to overseas markets, technology transfer and new employment opportunities. Also, the
need for a return is a strong incentive to efficiency. This paper acknowledges these potential
benefits, but argues that there are serious drawbacks, too. Many countries which need
development finance receive very little FDI. Just 20 countries receive 90 per cent of inflows
(and are perhaps over-dependent), while the 48 least developed countries receive less than
one per cent. They lack the infrastructure, skilled labour, innovatory capacities, and efficient
suppliers that attract transnational corporations (TNCs).
There are further disadvantages of FDI. These include: damaging competition for
investment; distortion of economic, social and environment policy; outflows (through assetstripping, high returns, royalties, etc.); import penetration; transfer-pricing (to avoid local
taxation); the squeezing of local enterprise; foreign exchange liabilities threatening future
stability. Short-term, speculative inflows contribute nothing to development, and sudden
outflows may result in bankruptcies, unemployment and government spending cuts, for
which ordinary people in the developing world pay. Governments may seek to tackle the
problem through reserve accumulation (costly and, ultimately, ineffective), taxes, currency
exchange controls, capital controls, and institutional mechanisms.
A major question is: how can investment be encouraged through better regulation, and
where might the regulatory body be located? In line with the orthodoxy that FDI is
ultimately beneficial to all, investing nations (with the UK prominent among them) have been
seeking a Multilateral Agreement on Investment (MAI). The aim is to protect, and thereby
encourage more, foreign investment. The proposed agreement laid down the principles of
non-discrimination, no entry restrictions, no conditions and no restrictions on capital
movement. It proposed the ‘rollback’ of any laws that conflict with MAI and a ‘standstill’
against any new laws that would conflict with it. It was claimed that if there were fewer rules
and restrictions, there would be more investment and hence more growth. Opponents
pointed to the North’s monopoly of the negotiations, the failure to balance investors’ rights
with due stress on their responsibilities, and the seeming denial of the role of national and
local government in guarding against harmful foreign investment. There was the suspicion
that developing countries would be constrained to sign up to MAI through the threat of
denial of vital investment.
The future of an international investment agreement is unclear following the breakdown of
MAI negotiations at the Organisation for Economic Co-operation and Development
(OECD) in 1998, and the failure of the Seattle Ministerial Meeting of the World Trade
Organisation (WTO) in 1999. (It was expected that investment would be included on the
agenda as a trade-related matter.) It seems almost certain that the issue will come up again
either at the OECD or the WTO or (as the MAI Coalition urge) under one of the UN
agencies.
1
Whatever specific proposals for the regulation and encouragement of FDI eventually
emerge, it is imperative that those concerned with poverty eradication and sustainable
development have clear principles with which to judge. This paper examines the biblical
principles relevant to the issue.
The Bible acknowledges the importance of wealth creation and good stewardship, but it
also affirms the prior claims of relationships and responsibilities. It asserts that the means to
wealth must be just, and it calls for a pattern of ‘interruption’ in wealth creation that
acknowledges it is not an ultimate good. Application of such radical principles would imply
a world economic order in which there were no ‘absentee corporate landlords’, perhaps no
limited companies at all, no interest charges, and a regular interruption of the economic cycle
that put rich and poor back on the same level. In a world that is imperfect (‘fallen’ in biblical
terminology) such ideas are unlikely to win wide acceptance. One possible response is to
opt out and seek to create investment models along biblical lines. The alternative course
might be termed ‘pro-active’. This will involve investment in the market place, while at the
same time engaging in dialogue, working for change from the inside. Both these courses
have biblical precedent, both present dangers (marginalisation on the one hand, compromise
on the other). This paper argues that both are needed today, so that each might balance,
and sharpen, the other.
Among the recommendations for FDI in the developing world are: the right and
responsibility of national governments to exclude investment that will not sustain community
or the environment; the need to give more say to developing countries in world economic
fora, with more openness in negotiations and arbitration (not imposition by the powerful) in
case of disputes; balance between the rights of TNCs and their responsibilities; regular
monitoring of FDI by civil society. It is further suggested that interest rates could be used
differentially to encourage productive investment. Measures should be taken to curb shortterm speculative capital and to integrate off-shore havens into the regular economy.
Introduction
In the 1970s much of the financial flows to the developing world was in the form of loans from governments, from the multilateral institutions and from the commercial banks.
Following the debt crisis of the 1980s there was a move to portfolio (equity) investment
(PI). This move was associated with debt-equity swaps and privatisation programmes.
Now the drive to globalisation has encouraged so-called ‘foreign direct investment’ (FDI),
some of it short-term and speculative, some longer term.
The current orthodoxy sees FDI and PI as more stable and mutually-beneficial sources of
development finance than debt-related commercial flows. Firstly, they provide finance to
the private sector for productive investment, whereas loan finance has tended to go to the
public sector for general balance of payment and budget support. Secondly, return is
determined by the success or failure of the investment, so the investor is strongly motivated
to ensure the efficient operation of the investment. (The supplier of loan finance, on the
2
other hand, need only concern himself with the repayment capacity of the borrower.)
Thirdly, FDI by multinationals is seen as offering the potential for technology transfer to the
host country.
This is the theory, but what is the reality? As a debt-based economic system tends to direct
resources to the safest borrowers, from whom a steady stream of interest payments may be
expected (rather than to those who need to borrow for development), will not an
investment-based system direct resources to those who offer the highest rate of return? Will
it not be the case that to the country which already has (a sizeable market to exploit, a good
basic infrastructure, etc.) yet more will be given, while the country which has not these basic
assets will be neglected? In other words the investor’s priority (profit), not the development
needs of the recipient country, will dictate the outcome. Or can both investor and recipient
(and the environment for that matter) benefit?
This paper looks, first, at current trends in overseas investment. It then notes the chief
advantages claimed for FDI and the most serious disadvantages. After a brief look at one
very disruptive form of investment (short-term speculative flows) it studies the moves
towards a Multilateral Agreement on Investment (MAI), first in the context of the OECD,
then at the WTO Ministerial meeting in Seattle. Finally the paper explores (in the biblical
writings) some guidelines for investment that is human- and environment-centred rather than
money-centred, and seeks to draw out some key principles and recommendations.
Investing in the developing world
Definitions :
Foreign Direct Investment (FDI) is the purchase, or construction, of productive capacity in a
country by an individual or company based outside the country. The investment will
comprise a bundle of assets, some proprietary to the investor (technology, brand names,
specialised skills, ability to establish marketing networks, etc.), some non-proprietary
(finance, many capital goods, intermediate inputs, etc.).
Portfolio (equity) investment (PI) entails the purchase of shares in a company or productive
enterprise, usually through a stock exchange. The purchase of more than 10 per cent of the
capital of a company is classified as FDI rather than PI. Such a purchase gives the investor
significant influence. However, the 10 per cent threshold is essentially arbitrary.
Current trends
There is no doubt that developing countries are now more open to inflows of foreign capital.
Partly this is because of the current belief that TNCs contribute to development. At the
same time many governments have improved their administrative capabilities and feel more
comfortable in dealing with TNCs. Another factor is that the World Bank and the
International Monetary Fund (IMF) have been requiring borrowing countries to open their
doors to foreign investment as part of their structural adjustment programmes. Many
developing countries themselves now want access for their own firms in foreign markets and
3
locations. (The developing country share of FDI outflows has grown from two per cent at
the beginning of the 1980s to 15 per cent in the mid-1990s.)
Much of the recent surge in FDI (39 per cent growth in 1998) is linked to acquisitions
associated with privatisation, or with the opening up of capital markets. In other words this
is investment of a one-off nature. Moreover, the net addition to production capabilities is
less than that implied by the value of annual FDI, since much of the inflows relates to
mergers and acquisitions, i.e. it is often simply a matter of change of ownership.
Nevertheless there is no question of the significance of FDI flows in the global economy.
The value of the output under the common governance of TNCs (parent firms and foreign
affiliates) now amounts to about 25 per cent of global output. Trade within TNCs, and
arm’s length trade associated with TNCs, are estimated to account for about two-thirds of
world trade. (Intra-firm trade, alone, is thought to account for about one third.) The role of
FDI in stimulating developing-country exports is unquantifiable, but it has been estimated
that TNCs account for 25-30 per cent of the total. The proportion of the capital stock of
developing countries which is foreign owned is not known, but it has been suggested that it
may be as much as 18 per cent in some countries. 1
These trends are clearly set to continue. In 1998 145 regulatory changes, relating to FDI,
were made by a total of 60 countries, 94 per cent of them in the direction of creating more
favourable conditions for FDI.2
This paper is concerned with investment flows to the developing world, but it is worth noting
that most investment activity is actually confined within the developed world. In 1997, for
example, developed countries accounted for 92 per cent of global outflows and 72 per cent
of inflows. Much of this is attributable to the USA and the European Union (EU), each of
them being the largest source of FDI for the other. A number of factors explain this activity:
the opening of markets as a result of liberalisation; fiercer competitive pressures brought
about by globalisation and technological changes; the search for size in order to be in a
better position to keep pace with a rapidly evolving technological environment. In many
instances it is a process that feeds upon itself as firms fear that if they do not find suitable
partners they will not survive. 3
What is particularly striking about investment flows to the developing world is the
concentration among a handful of home and host countries. In 1998 ten countries
accounted for four-fifths of global outflows. (Almost 90 per cent of the top TNCs are from
the EU, Japan, and the USA.) Just 20 countries (with 69 per cent of developing countries’
population) received 90 per cent of inflows. 4 China, Brazil and Mexico alone accounted
for almost 50 per cent. At the other end of the scale the 48 least developed countries
received less than one per cent.5 The net effect of this pattern is to leave most low-income
countries with limited access to FDI/PI, while some small economies and larger middleincome economies are over-dependent on such investment.
Since the 1970s there has been a shift away from Latin America to East Asia. In the period
1990-97 per capita FDI in Latin America was $62, while in the ASEAN countries it rose to
4
$31. 6 FDI flows to the five countries hit by the 1997 crisis (Indonesia, Malaysia,
Philippines, South Korea, Thailand) proved remarkably resilient
when compared with loan finance and portfolio investment. UNCTAD points to a number
of reasons for this.7 First, some TNCs which had an established corporate network of
integrated international production were able to take advantage of the currency devaluations
to increase their exports. This compensated for the fall in domestic sales. Some TNCs
took advantage of the lower asset prices to increase their stakes in their affiliates. Again,
TNCs were able to increase their capital investments because, in the wake of the crisis,
governments relaxed FDI regimes and intensified efforts to attract FDI. TNCs took account
of the still solid long-term prospects of the region. Thus in 1998, in the five crisis countries,
FDI flows were only two per cent down from the peak level of $18 billion in 1997.
On the other hand, less developed countries in Asia (Afghanistan, Bangladesh, Cambodia,
Laos, Burma, Nepal) were adversely affected. These countries are heavily dependent on
investments by firms from developing Asia, whose capacity to invest abroad was weakened
by the crisis. As for sub-Saharan Africa it remains marginalised, with per capita FDI of less
than $5 a year in the period 1990-97. For the years 2000-2003 the industries thought most
likely to attract FDI are tourism, food and beverages, telecommunications, textiles and
leather.
Developing countries themselves are sources of investment. The bulk of these flows is
accounted for by a handful of countries in East and South-east Asia, and Latin America.
Particularly significant is FDI among the member states of Association of South-East Asian
Nations (ASEAN), and intra-regional investment in Latin America. For example, the
trading group MERCOSUR has been instrumental in encouraging investment between its
four member states (Argentina, Brazil, Paraguay and Uruguay).
What factors attract inward investment? UNCTAD argues 8 that tax and other incentives
play a relatively minor role in attracting quality FDI flows, for good, long-term investors are
not the ones most susceptible to short-term inducements. The ability to provide immobile
assets is a crucial part of any FDI strategy. A large domestic market remains a powerful
magnet, but increasingly TNCs look for infrastructure, skilled and productive labour,
innovatory capacities, and efficient suppliers. Low-cost labour is an advantage, but a
diminishing one, since rising incomes erode the edge it gives.
For better or worse?
It should be remembered that the objectives of TNCs differ from those of host governments.
Governments seek to foster national development, while TNCs seek to enhance their own
competitiveness in an international context. The economic effects of FDI are almost
impossible to measure with precision. For one thing there is no precise method of specifying
a ‘counter-factual’, that is, what would have happened if the TNC had not invested.
Probably the most important factor in deciding whether TNC investment is beneficial is the
state and responsiveness of local factor markets, firms and institutions. Firms in most
5
industries prefer their suppliers to be nearby, so they will deepen local linkages if local
suppliers can respond to demands efficiently, but TNCs will not compensate for weaknesses
in local education or technology. In some cases the outcome of the FDI depends on how
well the host country bargains with the TNC. If natural resources are not a prime
consideration the TNC may have several alternative locations. The host country may also
have alternative foreign investors, but it is often unaware of them. Expert legal advice may
be crucial, but prohibitively expensive.
Advantages of FDI
TNCs have a number of major advantages and, provided their commitment is long-term,
they can contribute significantly to economic development in the host country. The latter will
need to be able to induce them to transfer their advantages in appropriate forms and it must
have the capacity to make good use of them.
The Indian software industry
Inducements offered by the government
(infrastructure, abolition of import
restrictions) brought Texas Instruments to
India in 1986, followed by Hewlett
Packard in 1989. Their investment helped
the Indian software industry at a critical
stage of its development, helping to
mobilise domestic capabilities. Since then
many domestic firms have established a
reputation for reliable, high-quality work at
relatively low cost. Now the five largest
software companies in India are
domestically owned.
One of the main contributions that TNCs
can make is to provide access to foreign
markets. This in turn can stimulate rapid
technological upgrading. Not only do
TNCs bring modern technology, they may
stimulate technical change in local firms by
providing assistance, by acting as role
models, and by intensifying competition.
(However, UNCTAD notes that
technological spillovers from FDI, are not
spontaneous.9) TNCs can also transfer
skills and knowledge, by bringing in
experts and by providing training facilities.
Another advantage of international
production is that it
Source: WIR 1999, p.250, citing Lateef, 1997; and
Taylor, 1999.
generates employment opportunities in
host countries (though it is only a small share - 2 per cent or less - of total paid employment
in those countries 10).
Disadvantages of FDI
Competition for FDI
The growing importance of FDI has driven host countries into intense competition, offering,
for example, relaxation of restrictions on profit remittances, indirect subsidies in the form of
infrastructure, and tax concessions. The result is to increase the amount of FDI, but to
reduce the long-term benefits per dollar of investment. Economic, environmental and social
costs (e.g. in the quantity and quality of employment) may reduce the net benefits of FDI
substantially. Moreover, it may well be that for the investor the question was where, not
whether, to invest, so that the developing country which gains the investment does so at the
expense of others. There is then no overall developmental benefit.
6
Bhopal 1984
On the night of December 2nd 1984 an
explosion at a Union Carbide factory in
Bhopal, India, released a cloud of
poison gas. The incident took place
during routine maintenance work. A
large quantity of water escaped through
leaking valves and corroded pipes
triggering a runaway reaction in tank
number E-610 containing 60 tonnes of
methyl isocyanate. This reaction
produced enormous heat and pressure
and 40 tonnes of a deadly cocktail of
chemicals spewed forth in a dense
cloud. Carried by a northerly wind the
cloud moved over the sleeping city like
a wall twenty to thirty feet high hugging
the ground. At least 6,000 people died
that night, and another 520, 000 people
were injured by the gas.
The government of India, acting on
behalf of the victims, initially sought
compensation of over $3 billion, but
faced with UC’s threat to stall the case
endlessly, it finally settled for $470
million. Most claimants received only
$600, with somewhat less than $3,000
being paid to the families of those who
died. According to campaigners UC
are still withholding information on the
exact composition of the leaked gases
and their effects on the body, saying
that these are ‘trade secrets’. Without
this information doctors cannot be sure
what is the proper treatment.
The case illustrates how hard it can be
to hold a remote, and powerful, foreign
investor to account.
Influence on politics and economic policy
Host countries must take into account the fact
that international investment agreements set
parameters for domestic policy making. They
must therefore ensure that any such
agreements leave them with the policy space
needed to pursue their development strategies.
Yet this is easier said than done. Large scale
flows of FDI will tend to create reliance on
them, so that policy is constrained by the need
to avoid any moves that discourage continued
inward investment. Foreign investors in
general, and multinationals in particular, may
come to have undue influence on the shaping
of policy. The danger of abuse of market
power will be particularly strong when the
entry of large TNCs raises concentration levels
within an economy. Then, if the bargaining and
regulatory capabilities of the host country are
also weak, democracy, indigenous
development and the welfare of the population
may all be undermined. This is a problem in the
North as well as the South. In 1999 BP
Amoco announced plans to merge its Alaskan
operations with another big Alaskan producer,
Arco. The combined group would control
about three quarters of the Alaskan petroleum
industry, and this rang alarm bells in the state.
Would the oil giant demand reductions in
royalty payments? Would it feel better placed
to evade environmental regulations? The state
governor, Tony Knowles, was moved to
declare: “Alaska cannot - and will not - be
beholden to a board of directors in London or
anywhere else.” He called for restrictions on
the BP Amoco investment, so that the
company would be committed to lower
pipeline tariffs for other producers, more jobs
for Alaskans, and a substantial endowment to
the local university.11
Impact on environmental policy
One particular area of concern is environmental policy. Many developing countries have
limited environmental regulations, and often lack the capacity to enforce them. Sometimes
TNCs are accused of locating their investments in order to evade
7
environmental regulations (UNCTAD says
that the evidence is not conclusive12) and,
likewise, some host countries have been
accused of using lax enforcement in order
to attract FDI in ‘pollution-intensive
activities’. On the other hand (and
probably as a result of these perceived
threats) TNCs are now under growing
pressure from home country regulations,
consumers and environmental groups.
Testing the ‘pollution haven’
hypothesis
There have been several approaches to
testing the hypothesis that TNCs direct their
investment to countries with lax
environmental standards. One method is to
correlate outward FDI with the standards,
and a second is to embed environmental
regulation in a larger model of locational
choice. Neither method has produced
evidence in support of the haven
hypothesis. A third approach - the use of
case studies - did produce examples where
TNCs acknowledged that they were
attracted by lax enforcement of regulations.
These examples were in Costa Rica,
Mexico, India, Indonesia, Papua New
Guinea and the Philippines. However,
UNCTAD notes that the method suffers
from selection bias, because only firms that
have actually moved are documented.
Outflows match inflows
Some take-overs lead to asset stripping,
and inflows can lead to outflows as
investments are liquidated. Even when
the investor comes to stay there may be
serious drawbacks in terms of import
penetration. TNCs may boost exports,
but they often prefer to buy inputs from
other parts of the same company based in
other countries. A case study of Thailand
Source: WIR 1999, p.298.
shows that FDI is part of the
explanation of the rise in the country’s
export/GDP ratio from 29 per cent in 1987 to 36 per cent in 1992. However, it was also
the cause of an even stronger rise in imports, as the investment and production were highly
import-intensive. The net impact on the trade balance in the late 1980s and early 1990s
was thus negative.
Moreover, the Bank for International Settlements (BIS) has noted a ‘significant weakening
of the relationship between foreign direct investment and the growth of exports in the
1990s.’ 13 The increased concentration of FDI in the services sector seems likely to have
played an important role in the weakening of this link.
Another aspect of this question is remittances in respect of royalties and licence fees. For
example, UNCTAD estimates that royalties and licence fees for Argentina, Mexico and
Thailand in 1986-96 amounted to over 10 per cent of the related FDI inflow into these
countries. 14
These features of FDI (import penetration, weakened link between FDI and exports,
royalties) seem to have contributed to the external imbalances that played an important part
in the 1997 crisis in East Asia. Bob Bischof, a German expatriate in Britain, asks whether
FDI is really so beneficial for the UK. He points out that when a French or US company
buys up a water or energy company, the profit stream flows overseas. When core
competencies, such as investment banking, are sold vital knowledge passes into the hands of
competitors. There are other, knock-on, effects as the foreign-owned firm now passes
banking and insurance business to the home country and orders components from there. 15
8
‘Transfer pricing’
TNCs may seek to evade taxes or restrictions on profit remissions by adjusting the prices at
which they make transfers within the company and its various foreign affiliates. This abuse
may have declined as tax rates have fallen and full profit remittances are now allowed in
much of the developing world, but it remains a widespread concern. Tackling it needs
considerable expertise and information, and the tax authorities in developing countries are
generally poorly equipped.
Adverse impact on local enterprise
In the case of natural resource-based
investments FDI may deny opportunities
to local producers. FDI which serves the
local market (e.g. bottling of soft drinks)
may displace local producers, and the
foreign exchange effect is clearly negative.
The foreign investor may also use up
scarce local inputs such as skilled labour.
Furthermore, when the host country is at
the intermediate stage technologically the
presence of TNCs may inhibit
technological development. With some
notable exceptions foreign affiliates tend to
do relatively little research and
development.
The Brazilian experience
In some areas of the Brazilian economy
FDI has meant the loss of the cutting edge
in research and development (R & D),
import penetration, and reduced ‘spillover’
effects.
In 1996/97 TNCs acquired three Brazilian
producers of motor parts - Metal Leve,
Freios Varga and Cofap. The R & D work
of these firms was downgraded, then
relocated to centres in the home countries.
A similar process has been observed in the
very competitive telecommunications field.
TNCs have acquired Brazilian affiliates
then, as a cost-cutting strategy, they have
scaled down local R & D, centralising it in
the parent companies. As a result highlyqualified engineers engaged in R & D have
been transferred to other, less-specialised,
functions, and effort has been shifted to the
simpler business of adapting imported
processes and products. In the hightechnology telecommunications and
information technology clusters in Campinas
and São Carlos foreign affiliates are no
longer linked into the local network of
suppliers, so that spillover effects from
networking and learning processes are
diminished. Sources: WIR 1999, p.202, citing
High returns extracted
Perhaps the greatest drawback of FDI/PI
is the cost. Direct investment is more risky
than the provision of loan capital, so the
foreign investor looks for higher returns.
Estimating rates of return is not easy
because sufficient data is not readily
available. One study 16 suggests returns in
the range 6 per cent to 15.6 per cent for
FDI, while for PI a study of 15 markets,
between 1976 and 1992, suggests an
average return of 29 per cent.
Cassiolato and Lastres, 1997, 1999.
Foreign exchange liabilities
While failure to gain FDI limits development, success in attracting FDI exposes the host
country to instability. The intention of the investor may be to stay long-term, and profits may
be reinvested in the host country. Nevertheless future foreign exchange liabilities are being
9
generated, and this may lead to problems if the economy of the host country gets into
difficulty.
In this situation the foreign investor may reduce the rate of investment, thus compounding the
problems. A linked issue is that of ‘contagion’, that is, the perception of foreign investors
that the problems of one country will be shared by other countries in the region, so that they
reduce investment generally. To quote two examples, problems in Mexico in 1994 led to a
flight from Argentina, while Malaysia and South Korea were affected by problems in
Thailand in 1997. Yet the situation in other parts of the region may, in fact, be quite
different. The problem of contagion is bound up with the ‘herd instinct’ of investors. This
herd behaviour is seen in entering an economy as well as exiting. It seems that investors are
strongly influenced by deep prejudices about particular regions. East Asia is generally
labelled ‘dynamic’, while sub-Saharan Africa is forever in ‘terminal decline’.
Short-term (speculative) flows
The problem
A far less welcome aspect of FDI is short-term capital flows, and these are on the increase,
so that in the period 1990-97 short-term net outflows accounted for two thirds of total
outflows. 17 There seem to be a number of reasons for this growth. The disinflationary tide
of the 1990s, resulting in falling nominal income, has caused international investors to chase
higher yields in riskier areas. Another factor is the cumulative impact of ‘moral hazard’,
where some institutions are seen to be ‘too big to fail’, i.e. the impact of their collapse would
be so disastrous for the economy as a whole it is assumed that, in the event of trouble,
governments would bail them out. Those institutions are thus encouraged to take ever
greater risks. Moreover, liberalisation has now gone so far that a default in, say, Russia or
Mexico prompts contagion across the globe.
Speculative flows include short-term bank loans, much portfolio investment (in particular
short-term government securities), non-inter-bank deposit holdings, liquid capital seeking
short-term arbitrage opportunities (that is, exploiting exchange rate differences on the
world’s money markets) and, most disruptive of all, currency speculation. (We will look at
this in more detail in a moment.)
Far from restraining all these speculative flows, government policy may actually encourage
them. For example, tax exemption for foreign depositors in the USA in the 1980s, together
with the tax deductibility of interest payments in Mexico, gave Mexicans an incentive to
engage in ‘round-tripping’ - moving funds to the USA then recycling the money as loans to
themselves. An important part of FDI flows to China is believed to originate in that country
itself. 18
Another aspect to the problem is that FDI inflows tend to be offset by capital outflows by
residents. (In the emerging markets net capital outflow grew from 14 per cent of net inflow
10
in the 1980s to 23.6 per cent in the 1990s. 19) Both phenomena are closely linked to capital
account liberalisation (CAL). Unrecorded capital outflows (‘capital flight’) continue, despite
increased liberalisation of foreign exchange and capital account regimes.
Currency speculation
Currency deals now total $1,500 billion per day, dwarfing both the reserves of central
banks, and trade in goods and services. (Annual global trade in 1998 in merchandise
exports and commercial services was a mere $6.5 trillion, or 4.3 days of trading on the
foreign exchange markets.) Most of the currency trading is transacted between banks.
American investment banks dominate the markets worldwide, although London, handling
about one third of all deals (daily turnover $637 billion) is the leading centre.
By the banks’ own admission, the greater the volatility, the larger their profits. NatWest
Bank, for example, notes that “currency and interest rate volatility provided significant
trading opportunities in the second half of the year”, 20 while Chase Manhattan reports that
the growth in its foreign exchange revenue “reflected strong results across a broad spectrum
of currencies, with particular emphasis on the Asian markets where volatility was high”.
In 1998 Barclays made a profit of $161.35 million from foreign exchange dealing, HSBC
made $977 million, NatWest $585.7, Lloyds TSB $180.7 million. The Royal Bank of
Scotland’s dealing profits for 1998 were an estimated $173 million, and the Bank of
Scotland made $32.1 million. Worldwide, Citigroup is the leading dealer: it handled the
massive sum of $8.5 trillion in foreign exchange transactions in 1998. Other leading players
are Chase Manhattan, Standard Chartered, ABN Amro, Deutsche Bank, Société Générale,
and Morgan Stanley Dean Witter. 21
No exact figures are available for the so-called ‘hedge funds’ as they are for the most part
based offshore and are therefore not subject to reporting requirements. Hedge funds are a
type of investment fund. They are partnerships, and are not open to the general public.
They generally invest in speculative instruments such as derivatives, which are basically bets
on future movements in financial indicators such as interest and exchange rates. The funds
are usually highly ‘leveraged’, that is, the original fund is used as a lever to raise borrowed
money. This in turn is invested and may become the lever for even more borrowing. Such
investments can bring large profits, but may also result in large losses. The assets under
management by macro funds, which bet on changing currency rates, are estimated to be
approximately $48 billion, averaging a return on investments of roughly 18 per cent per
annum (i.e. roughly $8.6 billion).
In sum, 95 per cent of all currency transactions are purely speculative - nothing is produced,
bought or sold. There are huge profits to be made, and sometimes there are spectacular
losses involving costly bail-outs. The main losers are ordinary people in the developing
world who pay for the instability with unemployment, bankruptcy, reduced government
spending, falling living standards and continued poverty.
11
Regulating international capital flows
There are a number of ways in which governments may seek to tackle the threats posed by
these short-term flows. The main options are reserve accumulation, taxes, currency
exchange controls, capital controls, and institutional mechanisms. (It is worth noting here
that the pace of globalisation makes it very difficult, if not impossible, for one country or
institution to address problems alone.)
Reserve accumulation is very costly, and may still be ineffective. In the 1990s it absorbed
20 per cent of net capital inflows, and 33 per cent of total net flows. 22 Holding reserves ties
up purchasing power that could be spent on the import of goods needed to increase output
and investment. Although income can be earned on reserves by investing them in
international assets, it will not equal the high rates developing countries have to pay on
borrowed funds. Thus the outcome is that fiscal policy becomes focused on keeping the
financial markets happy rather than on raising standards of living.
Taxes can be imposed at different points, for example when currency enters a country, when
it exits that country, or when the currency is exchanged. Speculative currency trading is
based on very small margins, so that a very small tax (e.g. 0.25 per cent) can wipe out the
profit and make the trading pointless. The tax proposed by the economist James Tobin
back in 1978, and since taken up by others, is a case in point. The suggestion is that a
modest tax on international currency transactions would have a calming effect on volatile
exchange markets. Moreover, the proceeds could be used for development. Other
taxation options are a Security Transfer Excise Tax (STET) on the sale of equity, shares,
bonds, options, etc. and a Financial Transactions Tax which would be a broader Tobin tax,
covering more kinds of transactions.
The options for currency exchange controls include direct controls (the government sets the
exchange rate), a managed exchange rate (where a smaller country links its currency to that
of a large country, e.g. the US$, or to a basket of widely traded currencies) and the limiting
of currency trading either to particular volumes or to licensed traders. Such controls may
encourage black market trading, and may prove unsustainable in the event of an attack on
the national currency.
Another option is to impose capital controls, that is, restrictions on inflows or outflows of
capital (or even a total ban on foreign investment). In general, restrictions on inflows are
thought to be the better option, rather than trying to restrict outflows after danger has
become reality.
The ‘Chilean model’ is one recent example of inflow controls. Chile introduced a
requirement that foreign investors place 20 per cent of the funds they brought into the
country at the central bank. The deposit earned no interest, and it could not be withdrawn
for twelve months. For longer-term investors this was not a significant problem, but it was a
deterrent to short-term investors. It has also proved flexible. The requirement was
increased to 30 per cent in 1992, then lowered to zero in 1997/98 in the face of fall-out
from the Asia crash.
12
The Asia crash also provides an example of restrictions on outflow. While Indonesia, South
Korea and Thailand submitted to IMF programmes, Malaysia chose another path. In
pursuit of domestic economic policies it wished to lower interest rates and, since this would
have led to a sudden outflow of capital and the collapse of the Malaysian ringgit, restrictions
were placed on outflows. Thus far warnings that international investors would retaliate by
avoiding Malaysia for years to come seem to have proved ill-founded, and Malaysia looks
like coming through the crisis rather better than her neighbours.
Controls require institutional mechanisms to enforce them. Depending on the type of control
in mind these will usually be national or international institutions. National institutions will
vary from country to country, but might include the central bank or a government
department such as trade and industry. International institutions which might fill a regulating
role are the Bank for International Settlements (BIS), the IMF, or even a new, purpose-built
organisation. Some economists have proposed a World Financial Authority, a kind of
international financial regulator.
The Multilateral Agreement on Investment (MAI)
What is MAI?
The aim of the Multilateral Agreement on Investment was a “free-standing” agreement, i.e.
outside the jurisdiction of national governments, enforced by an international tribunal.
Negotiations were officially launched at the OECD in 1995. Although the talks were
broken off in December 1998, they are almost certain to be revived sooner or later, perhaps
at the WTO, or back under the OECD.
The key principles being negotiated were:
non-discrimination: foreign investors to be treated as well as, or better than, domestic
investors
no entry restrictions: national and local government not to restrict the level of foreign
investment
no conditions, e.g. requirements to employ local people, or to stay for a minimum period
prohibition of restrictions on the movement of financial capital
‘rollback’ and ‘standstill’: MAI signatories would have had to agree to the progressive
repeal of laws that conflicted with MAI (‘rollback’) and not to pass any new laws that
would conflict with it (‘standstill’).
The aim was to outlaw anything that had the effect of ‘expropriating’ foreign investors or
harming their profit. Even unrelated legislation, which had an unintended discriminatory
effect, could have been challenged. Companies as well as governments would have been
able to sue governments over alleged breaches of MAI and to seek compensation for
‘expropriation’. Once a country had signed up to MAI it would not have been able to
withdraw for five years, and it would have been bound by MAI for fifteen years. It was
claimed that with fewer rules for investors, and with predictable and transparent laws, there
would be more investment, higher economic growth, and benefits for all. “Host countries
13
receive fresh capital, technology and know-how. Source countries get access to new
markets” (D Johnston, Secretary-general of OECD).
Criticisms
1. The OECD negotiated behind closed doors, though they claim to have consulted nonOECD countries. No attempt was made to inform or consult the public on the
implications of MAI.
2. Multinational companies seem to have been the driving force behind the negotiations, and
the emphasis was on securing their rights, not their responsibilities. National governments
would have been hampered in their role of minimising the damage that foreign investment
can cause, e.g. by maintaining laws on health, basic workers’ rights, minorities, the
environment. D Johnston denied this prognosis, saying that the MAI would not have
inhibited the normal regulatory powers of government.
3. Opponents of MAI claim that UK central and local government, the Scottish parliament,
the Welsh Assembly and Regional Development Agencies would have been restricted in
the policies they could pursue to enhance local development.
4. There was the suspicion that developing countries would be constrained to sign up to
MAI through multinationals treating it as a ‘stamp of approval’ for investors, i.e. without
adherence to MAI foreign investment would be unlikely.
5. The policies that would be prohibited under MAI were crucial to the development of
most, if not all, OECD countries in the past, e.g. restricting investment in certain sectors,
conditions about the number of local employees and the provision of training.
6. The proposed international tribunal would probably have been composed of investment
experts and lawyers, with little or no input from citizens and NGOs with experience in
development, the environment, labour issues, etc.
7. About 50 per cent of investment in Africa has been resource exploitation. Opponents of
MAI assert that it would have denied African countries the opportunity to diversify
economies away from commodities.
UK policy
In October 1998 there was a suggestion that the UK government might be prepared to think
again about investment rules under the WTO. Brian Wilson, then Trade Minister,
announced there would be ‘a blank sheet of paper’. However, under the UK government’s
position paper on the new investment agreement the main parts of the MAI remain. The
approach of the UK government may be summarised as follows:
Outward-oriented policies are more likely to be growth-generating and thus more effective
in reducing poverty. (Past failure in sub-Saharan Africa is seen as more a matter of poor
implementation rather than wrong policies.)
Trade liberalisation should lead to demand for labour, albeit unskilled labour.
If developing countries pursue policies that increase the supply of skilled labour then the
effects of ‘biased technological change’ on the skilled-unskilled wage differential will be less
severe and will provide an incentive for FDI.
The Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement will generate
rent transfers to industrialised countries and higher domestic prices in developing countries,
14
but should bring net benefits in the longer term - FDI, technology transfer, local R & D
activity.
import liberalisation is more likely to benefit urban, non-poor consumers, and those with
easier access to foreign exchange or with relatives living abroad.
The main differences between the new proposals and MAI are:
state-state dispute settlement, rather than the investor-state mechanism under the MAI.
(Yet, with governments under pressure from the multinationals, will this make much
difference?)
a more limited starting point for the agreement in order to entice developing countries to
accept it. The mechanism would then be a progressive negotiation that increased investor
protection and liberalisation, with a ‘standstill’ provision to prevent governments from
imposing any new regulations that would be against the interests of foreign investors. There
would be a stronger ‘right to regulate’, with a list of justifications, but it would not include
such grounds as development priorities.
The overall approach retains the core MAI principles of national treatment and nondiscrimination. There are no enforceable responsibilities for foreign investors and the clause
on not lowering labour and environment standards (toothless though it was) has been
dropped.
The OECD Guidelines for Multinational Enterprises
One area where some progress may be made is in the current (1998-2000) review of the
OECD Guidelines for Multinational Enterprises. These Guidelines were first drawn up in
1976, but they have had little impact, because they are wholly voluntary and have only a
very weak implementation mechanism. (The so-called ‘National Contact Points’ are
supposed to advise on implementation, but in practice most do virtually nothing in this area.)
The current review was a response to the growing civil society opposition to MAI. It was
suggested that the revised Guidelines should be annexed to the MAI, in order to set out
some investor responsibilities that would balance the proposed new investor rights.
The proposals include new general policies on sustainable development, human rights, good
corporate governance, effective self-regulation, and encouraging suppliers and subcontractors to apply the Guidelines. Other areas now covered include child and forced
labour, bribery and corruption, and consumer interests (e.g. advertising and labelling).
There are also a number of partially developed proposals, for example, a ‘white-list’ or
positive register of companies adhering to the Guidelines. Friends of the Earth say that the
most positive step in the review is the proposal to clarify that the Guidelines apply to all
multinationals whose head offices are in OECD countries, even when they are operating in a
non-OECD member country. (However, this clarification is opposed by the Business and
Advisory Committee of the OECD.)
Friends of the Earth think it unlikely that the revised Guidelines will have any direct positive
impact, as there are just too many loopholes. Furthermore it seems that the Guidelines are
to be ‘principles’ rather than ‘standards’. This will further encourage businesses to treat
15
them as optional, rather than as minimum expected standards of behaviour. It seems clear
that the only way in which the Guidelines will have any impact is by giving incentives to
progressive companies to advertise and promote their adherence to the Guidelines, while the
laggards risk exposure and shaming by civil society and the media.
The Third WTO Ministerial Meeting in Seattle
In addition to the ‘built-in’ agenda of previously agreed reviews the Seattle Ministerial
Meeting of November/December 1999 was due to begin work on a number of new issues
of which one was investment. It was also expected to launch a ‘Millennium Round’ of new
trade negotiations. In the event almost nothing was agreed. What caused this failure, and
what is its significance for investment?
The short answer is that no agreements were reached because all the main players had their
entrenched positions. The USA held to its environment/labour/GM agenda, and the EU was
unwilling to risk confrontation with its powerful farming lobby by agreeing to reform the
Common Agricultural Policy. The South resisted Northern pressure on environment and
labour rights, seeing this as protectionism in disguise. Their priority was to pursue unfinished
business from the Uruguay Round and to secure a review of the WTO’s performance so far.
NGOs and the internet played a significant role, informing and interpreting in behalf of
marginalised Third World governments and the media.
Was the breakdown in the talks a good thing or a bad thing? The answer to this question
probably depends on what happens next. There is still a possibility that the agenda of free
trade and investors rights’ will be pushed. However, without a detailed agenda and
timetable, and with the US Presidential elections in 2000, it is thought unlikely that real
progress will be made before the 4th Ministerial Conference, which will probably take place
in 2001.
Regarding investment the failure at Seattle does mean that there is now a chance to think
again. The MAI Coalition (of trade unions, churches, NGOs, some local authorities, and
small/ethical business associations) is not opposed to efforts to encourage investment by
TNCs. Nevertheless, it does not think that the WTO is the appropriate location (certainly
without a thorough overhaul.) It is calling instead for investment negotiations under one of
the UN agencies, with poverty reduction and sustainable development given priority over
new rights for foreign investors.
Biblical teaching on investment
Current orthodoxy requires us to believe that the market system is not simply one form of
economic life, but rather a reflection of the natural order of things. It has been raised almost
to the status of scientific law or religious dogma. Progress in science, technology and
16
economics is regarded as our historical destiny. This progress may be accompanied by
debt, unemployment, and a growing gap between rich and poor. Although this is
unfortunate, it is ‘the way things are’. Yet, as Brian Walsh comments, “when imagination is
constricted and ‘reality’ is organised in such a way that alternatives are considered
impossible, it is a give-away that idolatry lurks nearby.”23 What comments do the biblical
writings make on the world economic order? What alternatives do they offer to an idolatry
of ‘anxious, incessant production’?
Wealth creation or wealth denial?
There is no suggestion in the Bible that wealth creation is wrong. Rather it is God’s gracious
provision for humankind. From the beginning they were mandated to ‘subdue’ (develop)
the world (Genesis 1:28). The promised land is typically described as a country rich in
resources for God’s people to enjoy. The future kingdom of the Messiah is characterised
not only by righteousness and peace, but by a super-abundance in the natural world.
Human beings are also entrusted with personal gifts to be developed, and there is no ground
for suggesting that entrepreneurial gifts are not among them. Thus, in Jesus’s parable of the
talents, the two servants who trade and profit-share are commended, but the servant who
buries his talent is condemned. He has not even put his talent out at interest, which would
have been the logical thing to do with the money of a man who reaps where he has not sown
(see Matthew 25:14-30). Although this parable is not about wealth creation as such, but
about the proper use of God’s gifts, yet it makes use of an analogy from the world of
investment, and does so in a positive way. Good stewardship, wise provision for the future
(Genesis 41), fulfilment of one’s obligations, avoiding dependence on others - these
constitute one strand of biblical teaching which says that it is right to create wealth and put it
to good use.
Yet there is also clear teaching on the dangers presented by wealth creation and
accumulation. The Old Testament denounces the excessive extraction of profit from the
land (Deuteronomy 24:19-22). In the New Testament the disciple who worries about
tomorrow’s food and clothing, the brothers who dispute over the inheritance, and the rich
man who builds bigger barns for his growing wealth, are all alike judged and found wanting
(Matthew 6:25-34, Luke 12:13-21). So wealth creation is a right and legitimate goal, but it
must not be made an ultimate good, to be pursued no matter what the price. Material
wealth is in fact only part of the good that God has for humankind, and it is not the richest
part.
We have already seen that wealth may be created and accumulated in order to meet
obligations and avoid dependence. These are concepts taken from the realm of
relationships, and when we look at the guidelines for life that God’s covenant people were
given, it soon becomes clear that human life is all about relationships - with each other and
with God. It is in these relationships that our true wealth lies. The only truly durable asset is
the good done to others (Luke 16:9).
Therefore anything which damages our relationships takes away from our true wealth. Our
relationship with God (the Creator and Giver) will be damaged by economic activity that
17
degrades his creation, or which becomes a source of security independent of his bounty and
protection. To preserve relationships with neighbours the Israelite was held responsible for
any actions (his own, or those of members of his household) which resulted in loss, damage,
or injury to others. Such loss might arise through digging a pit and leaving it, letting a fire
burn out of control, or letting one’s animals graze in another’s field. Restitution must be
made but, better still, ‘prevention is better than cure.’ (See, for example, Exodus 21:28-36,
22:5-6, Deuteronomy 22:1-4, 8, 23:19-20, 24-25, 24:6, 10-22.) Thus the watchwords
for the community of God’s people were right relationships and responsible behaviour.
The law confronted Cain’s question ‘Am I my brother’s keeper?’ and answered with an
emphatic ‘Yes.’
To prevent longer-term damage to relationships through the accumulation of wealth the Old
Testament legislated for a unique economic system. Israel were to start off with a level
playing field where each family had economic resources to match its needs. Imbalances
between strong and weak would creep in, but before this went too far the field was to be
levelled again. How? Through a seven year/fifty year ‘structure of interruption’ 24 - the
special rules that applied to the sabbath and jubilee years. In the sabbath (seventh) year the
land was to be left unharvested for the benefit of the poor, debts were to be cancelled, and
slaves (who were probably debt slaves) were to be set free. Additionally, in the jubilee
year, the poor farmer who had been forced to give up his land was to receive it back.
Furthermore, through this seven year/fifty year pattern of interruption the people gave up
their self-sufficiency, and acknowledged their createdness and their dependence on God
(see Leviticus 25:1-55, Deuteronomy 15:1-15).
In sum, economics is made for man, not man for economics. Wealth creation is good, but
both means and motives matter to God. Wealth obtained through dishonesty, theft,
monopoly or exploitation is legislated against, and it is denounced by the prophets. The
motives for building wealth should arise from the need to sustain relationships and
responsibilities. At the personal level this is a call to prudence and faith, because different
circumstances call for a different attitude to possessions. If a Christian is free of obligations
he can adopt a ‘reckless’ attitude to material wealth. If he does have obligations - to his
family, to his community, or for his own old age - then he should invest. There is, however,
no other justification for accumulating wealth, and there remains a danger of overaccumulating through lack of faith.
So although there is no contradiction in the biblical teaching on wealth, there is tension, and
in daily practice the tension may be acute. If we conclude that circumstances require us to
invest we face the problem that almost every kind of investment available today seems to
conflict with biblical standards.
What kind of investment?
Most people invest through intermediaries (limited companies, banks, building societies, unit
trusts). The difficulty for individual investors (if they care for anything other than the return)
is that they have little, if any, influence over policy decisions and no influence over day-today business practice. Yet they bear ultimate moral responsibility for investment decisions
made on their behalf. When investments are made on the other side of the globe then the
18
policy of a distant board of directors, and the dividends of far-away lenders, may over-ride
such matters as pollution, job losses, and the squeezing of small businesses. The case of
limited companies offers a further problem, namely, that in the event of business failure
shareholders do not have to pay the company’s debts. In other words the concept of
limited liability offers profit-taking without responsibility.
Government borrowing raises further questions. It may be right for the government to
borrow and provide assets (power stations, roads, bridges, and so on) which will benefit
future generations. But if the government borrows in order to meet current expenditure then
it is awarding benefits to one generation and passing the costs to later generations of taxpayers in the form of a burden of debt.
Non-standard forms of investment also seem to be ruled out. Holding assets as a hedge
against inflation is an anti-social act, depriving the economy of the employment-generating
consequences of spending or investing the resources. Speculation is merely redistributive,
transferring resources from losers to winners, and it presumes upon the future.
The question of interest
A further, and very fundamental, question arises. A company seeking funds for productive
investment must compete with those entities (e.g. banks) which receive deposits and lend
them out again, paying and charging interest. In fact our whole economic structure is largely
built on the exaction of interest. Yet this practice is described in the Bible (Luke 19:22-23)
as ‘reaping where one has not sown’ which is really ‘reaping where someone else has sown’
- that is, theft. Interest-taking widens the gap between the poor (who have to borrow) and
the rich (who receive the interest).
Are we expected to take the prohibition of interest as serious economic theory for the 21st
century? Is it not an unrealistic ideal from a distant age and a distant culture, with no
relevance in our ‘sophisticated’ society? In his paper ‘The Ban on Interest: Dead Letter
or Radical Solution?’ Dr Paul Mills puts this counter-question: when the lender delivers
resources to the borrower and, some time later, receives back more than he paid out, what
service is being paid for? Conventional wisdom sees it as a) a ‘reward’ for ‘abstaining’
from immediate consumption, b) an incentive to save, and c) a means of allocating finance
efficiently (by providing a price signal). Is there any answer to these points?
Dr Mills argues that an interest-based financial system has serious practical consequences.
It skews economic decision-making towards short-term projects and ‘safe’ borrowers. It
may foster careless investment as the lender does not need to be very careful, so long as the
collateral seems sufficient. As for the banks, they require government ‘safety-nets’ as they
seek to do the irreconcilable, that is, guarantee the value of deposits, and risk those same
deposits by making loans - and safety-nets may encourage excessive risk-taking.
Furthermore, interest charges amplify the economic cycle. Low rates encourage overborrowing, then high rates drive firms into bankruptcy.
19
Mills’s most serious charge concerns the tendency of interest-based systems to selfdestruction. He notes that scientific observers of economics perceive a logical contradiction:
the ability to charge a positive compound rate of interest can only be sustained if productivity
increases at the same rate, yet natural resources are physically unable to sustain exponential
rates of growth for anything other than a short period of time. Something else has to give - a
counteracting force such as inflation, bank failures, confiscatory taxes, or repudiation of
debt. This spells volatility, and the usual outcome is state intervention to avert the threatened
self-destruction.
Does the Bible offer an alternative to lending and interest-taking? Exodus 22:14-15 appears
to give tacit sanction to rental and income-share arrangements. In this case ownership, and
therefore the risk of damage or depreciation, remain with the lessor. (In the case of a loan
the ownership, and therefore the risk, are temporarily passed to the borrower.)
Principles
This biblical material leads to some rather radical conclusions. Their application would imply
the creation of a world economic order in which there were no absentee corporate
‘landlords’, no interest, no limited companies even, and most radical of all, a regular
interruption of the economic cycle that put rich and poor back on the same level. It is not
altogether surprising that the President of the World Bank recently described the idea of
applying the Old Testament jubilee in AD 2000 as ‘whimsical’!
Clearly changes as radical as these are unlikely to be accepted. So, is the Christian’s only
option to detach himself from the system (if that were possible) and denounce it from the
outside? Or can one engage in the market place and work for change from the inside?
Biblical precedent can be found for both options. People such as Elijah, Amos, and the
Rechabites were called upon to challenge the sinful materialism of their day, by stepping out
of the system and creating a very different lifestyle. Joseph, on the other hand, was
appointed to serve the Egyptian state, and Daniel the Babylonian. Elijah’s contemporary,
Obadiah, stayed at his post in the service of King Ahab so that, from the inside, he might
counter some of the worst policies of the regime (I Kings 18:13). Neither course of action
is an easy option. The first may incur misunderstanding, ridicule and marginalisation. It
might even turn sour and end in self-righteousness. The second will involve ethical dilemmas
on a daily basis, as the less-than-perfect is pursued because it is better than the thoroughly
bad. It may all end in debilitating compromise.
There seems to be no way to reconcile these two views, and perhaps the attempt should not
be made. Some Christians will be called to opt out, to devise and model radical alternatives
to the market economy. Others will be called to stay within the system and work for its
transformation.
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Conclusions and recommendations
In these conclusions we consider first investment (in-country or transnational) by individuals
and then investment by corporations. It should be remembered, however, that investment is
made by corporations in the name of their individual shareholders who thus bear ultimate
moral responsibility for what is done in their name.
Investment by individuals
If almost every modern means of investment is, to a greater or lesser degree, questionable,
and if the whole system is based on a practice (usury) banned in Scripture, what is the
investor to do?
In Guidelines for Ethical Investment (written to stimulate debate about the investment
policies of the Church Commissioners of the Anglican church) the Christian Ethical
Investment Group accept that the majority of investments will be made in the market place in
the ordinary way. They do, however, advocate a pro-active approach. This will mean
‘constructive engagement’ with companies whose activities and/or policies raise ethical
problems. Dialogue can continue so long as the company shows that it is open to change,
but disinvestment is kept as an option to be followed if no changes in company policy can be
brought about.
Paul Mills puts forward some more radical suggestions. He considers a number of funding
needs and the appropriate investments to meet them. For productive investment a profitshare arrangement will be appropriate, for the purchase of property a rental or income-share
arrangement, and for awkwardly timed payments a non-interest revolving credit
arrangement. There would be a need to establish a relationship between the suppliers and
users of capital and this points to local investment (extended family, church, local
community) as the obvious starting point for learning about ‘investment-within-relationships’.
It is but a starting point, however, for the poor of the Third World are our neighbours, too.
An individual or group in the North may be able to form a valid relationship with, for
example, a farmers’ co-operative in the South. If this is not possible then managed ethical
funds would seem to go some way towards addressing the issues of relationships and
responsibilities.
Mills acknowledges that the changes proposed are probably too radical to be realisable in
the near future. A start could be made by removing incentives to incur debt, and by allowing
banks to offer customers cheque-able unit trust accounts.
Investment by corporations
It can be acknowledged that FDI may bring substantial benefits to the host country, and one
particularly welcome feature (compared both with bank lending and portfolio investment), is
21
its relative stability. Yet the potential to do substantial harm remains. Policy should
therefore be directed towards strengthening the positive and mitigating the negative affects.
One key to strong relationships is proximity. The more local the government the easier it
should be to hold it to account. This is sometimes called the principle of ‘subsidiarity’. (It
also brings dangers, such as cronyism between local government and business.) National
and local governments have the responsibility, and must be allowed the legal power, to
exclude investment that a) does not build human community, or b) harms the environment.
There should be an ‘order of precedence’ in international treaties so that when, for example,
the provisions of a trade agreement conflict with the terms of an agreement to protect human
rights or the environment, the latter take precedence. Entry into a domestic market by a
foreign investor should not be seen as a right (as would be the case under the Multilateral
Agreement on Investment).
South-South investment flows could be assisted by helping firms from developing countries
to obtain insurance from the Multilateral Insurance Guarantee Agency (MIGA), an arm of
the World Bank. Such insurance often depends on the preparation of environmental
assessment studies, and the establishment of a trust fund to assist with the costs would be a
significant help.25
If FDI is admitted then the community should remain central, with the TNC as just one of its
stakeholders. Investors should be held responsible for the impact of their investment on the
environment and on community development. Where results are uncertain the approach
should be precautionary. The requirement should be to show that concerns, whether
environmental, social, or cultural, have been dealt with before proceeding further.
Investment in the exploitation of renewable resources, such as forest products or fisheries,
should include investment in replenishment.
It is surely appropriate that there should be an ongoing programme of monitoring the impact
of FDI. The investor’s performance should be measured not just by dividends and share
prices, but through an assessment of the impact of the investment, positive or negative, on
the community and the environment. This is an area where civil society, including the
churches and indigenous development agencies (perhaps with the help of their counterparts
in the developed world), rightly has an important part to play.
Another key to strong relationships is the upholding of the fundamental equality of the
parties. This principle is breached by the imbalance between the developed and the
developing worlds in economic decision-making. Many key matters are negotiated within
the club of thirty or so nations in the Organisation for Economic Co-operation and
Development, or the even smaller G7 group of the world’s richest countries. Voting power
at meetings of the boards of the World Bank and the IMF depends on shareholder stake,
which in turn depends on national wealth. At the World Trade Organisation, too, it is the
richer nations that sway the decision-making. Yet in a modern democracy the principle of
‘one man, one vote’ is unquestioned. No one would think of suggesting that the wealth of a
rich man should entitle him to more voting power than a poor man. To use another analogy,
in a building society the borrowers are just as much members of the society as the savers. It
22
is therefore urged here that the developing world’s lack of bargaining power in negotiations
over trade and investment agreements needs to be addressed. The almost unrestrained
power of the international financial institutions to impose structural adjustment programmes,
for example, results in a lack of ownership. It is not suggested here that the World Bank
and the IMF should adopt a system of one country, one vote, but that more weight be given
to population and economic need, and somewhat less to sheer wealth. Developing countries
will need help in building the skills and resources of negotiating teams. Thus a programme of
technical help and capacity-building would be needed before there could be a meaningful
process of shared decision-making.
It is further suggested that when disputes arise arbitration should be available at some sort of
international tribunal. It should not be open to the rich and powerful to impose a settlement.
This principle is already a recognised part of a number of international environmental
agreements. For example, the Bamako Convention on the import and movement of
hazardous waste within Africa (1991) provides that, in the event of an unresolved dispute,
the matter shall be referred either to an ad hoc body set up by the Conference or to the
International Court of Justice. The concept of arbitration is also being mooted in connection
with the international campaign for Third World debt relief. It has been pointed out that, at
the personal level, a creditor is not able to act as judge and jury when a debtor applies for
bankruptcy.
Another key element in healthy relationships is openness. In contrast negotiations on
investment issues are too often conducted in secrecy. This makes it easier for the strong to
twist arms because they can do so away from the spotlight. Trade and investment
negotiations should be conducted in the open, with information released into the public
domain fully and quickly. Civil society in both the North and the South should be involved.
We have seen that in God’s pattern for society each family had a recognised place, but
rights and responsibilities were to be held in balance. Surely the same principle should be
upheld in the area of investment. It is particularly important to hold TNCs to their
responsibilities, because they have greater scope for evasion. (This is another case where
developing countries need help with capacity-building if they are to deploy the human
resources needed to tackle abuse.) MAI would accord TNCs equal rights with domestic
investors, and this should not be conceded without their acceptance of equal responsibilities.
For example, TNCs have scope for avoiding paying their taxes through means of so-called
‘transfer-pricing’. Unlike national companies they also have the option to liquidate their
investment and leave just as soon as the economy encounters difficulty. Foreign investment
should entail some commitment to stay and share in losses as well as profits. (Stability is
another key element in healthy relationships.) Rather than Capital Account Liberalisation,
governments should be working towards a system of Capital Account Regulation that will
encourage long-term as against short-term investment. In return investors have the right not
to be expropriated.
We have noted that short-term speculative investment is not wealth creation, but gambling,
and it is very disruptive in its effects. It cannot sustain right relationships, or meet
responsibilities. The contribution supposedly made by currency speculators in ironing out
23
exchange rate differences between financial centres (so-called ‘arbitrage’) cannot
compensate for the dangerous volatility introduced into the market. Moreover, that volatility
affects not only the speculators themselves, but the whole economy. The turbulence may
not be limited to one national economy. World markets are now so inextricably linked that
the bursting of a speculative bubble in one centre may quickly spread across the globe,
destroying healthy companies along with the weak. As a matter of urgency a ‘Tobin’ tax
should be introduced with a view to damping down this activity. The idea is that a small
(say, 0.25 per cent) tax on foreign exchange transactions, collected through national central
banks, would have a calming effect on volatile exchange markets. As a by-product (in truth
a very large by-product), the tax would become a source of funding for development.
However, there should be a long-term goal of returning to a situation where the buyers and
sellers of currency are required to demonstrate that their transaction is related to the transfer
of real goods and services.
It has also been noted that the Bible legislates against the exaction of interest. Yet this
practice is now so deeply embedded in the world economic system it is difficult to imagine
that it will ever be abolished. Can the system of charging interest be employed to serve a
number of desirable ends? One obvious answer is that it encourages the prudent activity of
saving, for interest might be regarded as compensation for inflation, and without such
compensation saving would certainly be discouraged. An interest charge might also be used
to deter excessive and unwise expenditure. Perhaps differential interest rates could be
employed. For example, borrowing to invest in health and education might be interest-free,
while borrowing for infrastructure projects (roads, bridges, power stations, and so on)
would incur moderate interest payments that would be covered by the income generated.
Borrowing for non-productive expenditure, such as arms purchases, would incur much
higher interest charges.
The question of off-shore havens needs to be addressed, because of its relevance to a
number of issues affecting the developing world. It has been noted that grand corruption
would be impossible without the banking and company formation facilities these havens
offer. The arms brokers who help to fuel civil wars in many parts of the world make use of
the same facilities. Third World elites transfer to these havens funds which should be
employed at home to develop the national economy. The ending of the ambiguous status of
these havens, and their integration into the regular economy, must surely be a priority.
24
APPENDICES
Glossary
The Cairns Group
A 16-member group of leading farm exporters, including Australia, Brazil and Canada.
The MAI Coalition
The Coalition was formed during the MAI campaign and includes a broad range of
organisations, including the major trade unions, churches, environment, development and
human rights NGOs, some local authorities, women’s groups, small business associations
and ethical businesses. The Coalition opposes negotiation of investment rules at the WTO.
Not all of the Coalition members oppose a new Round.
The Tobin Tax is named after the Nobel Prize-winning economist, James Tobin, who first
made the proposal in 1978. The idea is that a small (say, 0.25 per cent) tax on foreign
exchange transactions would have a calming effect on volatile exchange markets, and also
raise money (up to $250 billion per annum has been suggested) for development. The tax
would be collected through national central banks. This would not be as complex as it might
sound as 80 per cent of international currency transactions are handled by just seven
countries (USA, UK, Japan, Singapore, Switzerland, Hong Kong and Germany). The
proceeds would be deposited with an appropriate UN body, to be used by the various arms
of the UN (UNDP, UNESCO, UNCTAD and UNICEF) to finance poverty eradication
programmes. Transactions via tax havens could be taxed on re-entry to official world
markets. It is argued that the trade in goods should not suffer. For one thing 40 per cent of
such trade takes place within the branches of TNCs and is financed by bookkeeping entries.
Trade might well be boosted by the reduced currency volatility. A development of the
proposal is the Spahn Mechanism which would institute a two-tier system, with a higher rate
to be activated in times of exchange rate turbulence.
TRIPs (Trade Related Aspects of Intellectual Property Rights) agreements commit
governments to allowing companies to patent new discoveries and, more controversially,
certain varieties of plants.
The World Trade Organisation
The World Trade Organisation (WTO) was formed in 1995. It replaced the 1947 General
Agreement on Tariffs and Trade (GATT), and its mandate was: to liberalise international
trade through reducing barriers, to settle trade disputes between members, to facilitate trade
negotiations, and to help countries implement trade policies through the provision of
technical support. 135 countries are members of the WTO and 30 (including China) are
currently waiting to join.
25
The WTO is run on the principles of Most Favoured Nation or MFN (no country should be
given preferential treatment over another country within the WTO), and National Treatment
or NT (the goods and services from any importing country should be given at least as
favourable treatment as goods and services from the domestic sector).
In principle, voting is on the basis of one member, one vote, but in practice many decisions
are negotiated informally by the powerful ‘Quad’ (the EU, USA, Japan and Canada). The
highest authority and decision-making body is the Ministerial Conference. The General
Council is responsible for ensuring that decisions made at the Ministerial Conference are
implemented. Disputes are referred to the Dispute Settlement Body (DSB).
The WTO has drawn criticism for a number of reasons. First, it seems that trade takes
precedence over other issues such as justice, social development and environmental
protection, and is often in conflict with them. Secondly, the ‘precautionary principle’ is not
applied, that is, measures to restrict trade can only be put in place if one party shows that a
particular process, product or action is unsafe. Thirdly, discrimination is only allowed on the
basis of what is produced, not how it is produced. However, the production may involve
child labour, hazardous waste disposal, or untried genetically modified (GM) foods,
significantly more harmful than the ultimate use. The WTO does not have expertise in nontrade issues such as the environment or social justice. Fourthly the WTO has been accused
of a lack of transparency and accountability. Fifthly, the poorer countries do not have the
technical and financial resources to participate in lengthy and complex negotiations. Lastly, it
is said that multinational companies have too much influence at the WTO.
26
The UK’s top transnational corporations, ranked by foreign assets, 1997
Ranking by
Corporation
Cross-border
Industry
Employment:
Assets:
For.ass
TNI
3
18
30
34
42
60
63
71
77
90
94
44
5
42
18
25
17
46
14
37
13
24
links
Royal Dutch/Shell Group
Unilever
British Petroleum
Cable and Wireless
Diageo
ICI
RTZ Cra
Glaxo Wellcome
British American Tobacco
BTR
Smithkline Beecham
Neths/UK
Neths/UK
UK/Aust
Foreign
Petroleum
Food and beverages
Petroleum
Telecommunications
Beverages
Chemicals
Mining
Pharmceuticals
Food, tobacco
Plastics and foam
Drugs, cosmetics
Source: UNCTAD World Investment Report 1999
27
70.0
25.6
19.2
10.6
10.2
8.1
7.5
6.8
TNI
Sales:
Total
115.0
30.8
32.6
21.6
29.7
15.2
16.7
13.6
84.8
12.7
10.4
Foreign
Total
69.0 128.0
44.8 46.4
36.5
71.3
7.8
11.5
17.6
22.6
14.7
18.1
5.8
9.4
12.1
13.1
26.2
34.5
11.5
12.3
4.6
6.6
Foreign
Total
65,000
262,840
37,600
33,740
63,761
51,400
27,297
105,000
269,315
55,650
46,550
79,161
69,500
50,507
53,068
117,339
110,498
30,000
115,000
90,878
%
58.9
92.4
59.2
74.7
71.0
75.0
58.6
78.2
61.1
78.2
66.6
28
ABBREVIATIONS
ASEAN
BIS
BIT
CAL
COW
EPZ
FDI
GATS
IFIs
IMF
INCHRITI
M&A
MERCOSUR
MIGA
NGO
OECD
PI
R&D
TNC
TRIMs
TRIPs
UNCTAD
Association of South-East Asian Nations
Bank for International Settlements
Bilateral investment treaty
Capital account liberalisation
Committee of the Whole (of the Seattle Ministerial meeting)
Export Processing Zone
Foreign direct investment
General Agreement on Trade in Services
International Financial Institutions (the World Bank, IMF, and the
regional development banks)
International Monetary Fund
International NGO Committee on Human Rights in Trade and
Investment
Mergers and acquisitions
Mercado Comun del Cono Sur (Southern Cone Common Market)
Multilateral Insurance Guarantee Agency (an arm of the World Bank)
Non-government organisation
Organisation for Economic Co-operation and Development
Portfolio investment
Research and development
Trans-national corporation
Trade Related Investment Measures
Trade Related Aspects of Intellectual Property Rights
United Nations Conference on Trade and Development
SOURCES
The Bible
Duncan McLaren ‘The OECD’s revised Guidelines for Multinational Enterprises: A
step towards corporate accountability?’ (Friends of the Earth briefing paper)
Paul Mills ‘The ban on interest: Dead letter or radical solution?’, Cambridge Paper (Vol 2,
Number 1, 1993)
Paul Mills ‘Faith versus Prudence? Christians and Financial security’, Cambridge Paper
(Vol 4, Number 1, 1995)
Paul Mills ‘Investing as a Christian: Reaping where you have not sown?’, Cambridge
Paper (Vol 5, Number 2, 1996)
Peter Selby Grace and Mortgage (London: Darton, Longman and Todd 1997)
29
‘Our Best Interest: Guidelines for Ethical Investment’, The Christian Ethical Investment
Group (November 1992).
‘A dangerous leap into the dark’, WDM briefing paper (November 1997)
Questions and answers on the MAI, WDM (January 1998)
Update on the MAI campaign, WDM (February 1998)
Donald Johnston (Secretary-general, OECD), ‘The case for MAI’, Financial Times,
24/2/98
Trade negotiations in the WTO Millennium round - options for the poor, Christian Aid
International Policy Team briefing, May 1999
David Woodward, ‘The next crisis? Direct and portfolio investment in developing
countries’, Eurodad paper, September 1997
Trade and Development Report 1999 (UNCTAD)
World Investment Report 1999 UNCTAD (New York and Geneva: United Nations,
1999).
Matthew Siegel, ‘Control of International Capital: A Survey of Policy Options’ (Friends of
the Earth-US, discussion paper, November 1998).
1
D Woodward
World Investment Report (Overview) 1999, p.8.
3
WIR (Overview) 1999, pp.20-21.
4
Trade and Development Report, 1999 UNCTAD, p.104.
5
WIR (Overview) 1999, p.17.
6
TDR, 1999 UNCTAD, p.115.
7
WIR 1999, p.56.
8
WIR (Overview) 1999, p.36.
9
TDR, 1999 UNCTAD, p.123.
10
WIR (Overview) 1999, p.14.
11
Financial Times
12
WIR (Overview) 1999, p.46.
13
Quoted in TDR, 1999 UNCTAD, p.123.
14
TDR, 1999 UNCTAD, p.120.
15
Bob Bischof, ‘The limits to inward investment’ Financial Times 11/1/2000.
16
By David Woodward of CIIR
17
TDR, 1999 UNCTAD, p.113.
18
TDR, 1999 UNCTAD, pp.107-8.
19
TDR, 1999 UNCTAD, p.106.
20
Quoted in Helen Hayward The Global Gamblers (War on Want)
21
Helen Hayward ‘The Global Gamblers: British Banks and the Foreign Exchange Game’
2
30
22
TDR, 1999 UNCTAD, p.108.
Brian Walsh ‘Bowing to the inevitable?’ Third Way June 1998.
24
Peter Selby Grace and mortgage
25
WIR (Overview) 1999, p.19.
23
31